Investors cautious ahead of Greece developments and UK electionLeading shares have reversed early gains as jitters about the UK election and worries about Greece’s finances unsettle investors.Mining shares were mixed as BHP Billiton, up 0.5p at 1463.5p, said it was slowing down its expansion plans in iron ore in the wake of plunging prices. But BHP said iron ore production rose 20% in the three months to March, compared to a year ago, and revised up its forecasts for the year by 2%. Rio Tinto has risen 20.5p to 2832.5p but Anglo American is down 8p at £10.09.Following the acquisition of EE, BT has secured a strong network position at a time when European regulators (and Ofcom) are incentivising network investment; and it will stand alone as the only integrated operator in the UK with the benefit of network economics on both fixed and mobile services. This should ensure a competitive proposition into the long term in a market that is likely to see further consolidation in time. We modify our previous view of margin decline in the long term and now assume stable profit levels. Our discounted cash flow-based target price rises by 6% to 550p. We reduce Hargreaves Lansdown given a lack of valuation support and note that unlike asset managers its ‘bedded value’ back book has the potential to be re-priced.On May 6th GlaxoSmithKline will host first quarter 2015 results and a Capital Markets Day, where we expect a divisional outlook for Pharma, ViiV, Vaccines and Consumer. Our sum of the parts analysis finds even valuing ViiV at 21 times 2016 net income (£18bn), Consumer at 21 times 2016 net income (£10.4bn) and Vaccines at 18 times 2016 net income (£19.2bn), Glaxo’s current valuation implies the Pharma division trades at 16 times 2016 PE, which seems too high, given our forecasts for this division to see an net income compound annual growth rate 2016-20 of -2%. More appropriately reflecting Pharma pressures, using 12 times 2016 PE implies a £13.80 share-price, 12% downside. There is considerable uncertainty on the outlook for Glaxo as the 9 buy, 18 hold and 7 sell recommendations suggest...We show that the Novartis deal doesn’t ‘transform’ the business; Pharma remains around 70% of earnings before interest and tax in 2018. We show that Vaccines and Consumer businesses do not grow at the same rate as Home and Personal Care [operations] and our £14.00 sum of the parts valuation fully incorporates any break-up value. Our analysis rules out the possibility of Glaxo replicating AstraZeneca’s pipeline led re-rating. Worryingly, the dividend exceeds free cash flow for the next 3 years. Sell, price target £14. Continue reading...
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